How Financial Literacy Improves Financial Well-Being

Living as an adult often comes with many financial problems.

From managing money to cover daily necessities and life improvements, adults are constantly anxious about their finances. They even start to believe that it’s the norm. But that’s not true. Financial issues are not a hallmark of adulthood. Financial stress just means that they need to improve their financial literacy.

This article aims to educate adults on how to be financially stress-free. It will discuss the concept of financial well-being and the role of financial literacy in achieving it. Hopefully, people will make more informed decisions about money with practical tips on how to put financial literacy into practice.

There is no more time to waste. Understand how financial literacy can directly impact one’s life by leveraging financial well-being. Take a step and become a responsible adult who overcomes financial pressures. Be confident and lead the path to financial well-being.

What is financial well-being?

Financial well-being is an individual’s perception of their financial situation, which can range from stressful to highly satisfying. Being stressed about one’s financial status indicates low financial well-being, whereas a satisfactory financial status indicates high financial well-being.

It is important to understand that income level is not necessarily the main factor supporting higher levels of financial well-being. People can have higher salaries than the average and yet continue to stress over bills every month.

On another note, lower salaries do not necessarily predict whether people will experience financial stress. As long as ongoing bills are paid off, one may feel safe with money, and can spend on personal interests, it is likely they have scored high on financial well-being.

Therefore, financial well-being is not just about net worth.

Financial literacy is about skillfully managing money, having resources for future financial challenges, and having the freedom to enjoy life’s pleasures. The required skills to support these are all covered in financial literacy.

Core dimensions of financial literacy

Financial literacy is the knowledge and understanding of financial concepts and risks, paired with the necessary skills, motivation, attitude, and behavior to apply this knowledge effectively. The aim is to manage financial resources responsibly and make informed decisions across various financial contexts, thereby nurturing financial well-being.

Financial literacy can be understood through four core dimensions:

Financial knowledge

The first dimension refers to an individual’s grasp of financial concepts and their ability to manage money effectively. This includes understanding basic concepts related to money.

Financial knowledge is important because it is the first step towards understanding what actions to take to manage money effectively.

Here are the basic concepts that people should be educated on:

Budgeting. This involves keeping track of where your money comes from and where it goes. A clear picture of the cash flow helps you spot areas where you might be overspending and allows you to adjust them. Mastering this ensures your money is enough to fulfill current needs and plans.
Saving. This is keeping some money to build a safety net for unexpected events and working towards financial goals (e.g., down payment on a house or a comfortable retirement). Regular saving habits provide a sense of security.
Investing. This is like saving, but the money grows in time (e.g. putting it in stocks). However, this requires careful decision-making and a good awareness of the risk.
Debt management. This is a skill of processing debts by understanding the amount and the timing of clearing them. Smart debt management prevents financial stress and protects your credit score, giving you more financial flexibility down the line.
Using financial products/services. This is a skill that involves understanding various types of bank accounts, loans, insurance, and investment options. When done with careful calculations, these can help one achieve one’s financial goals.

Financial behavior

This focuses on the capacity to recognize how financial decisions impact one’s circumstances and to make financial decisions.

Both broader economic factors and individual influences, such as cultural values and beliefs, shape this behavior. Positive financial behavior often manifests in increased savings, timely bill payments, and proactive engagement with financial products.

In other words, it is about applying knowledge to manage day-to-day finances and work towards long-term security.

Financial attitude

The third dimension reflects an individual’s feelings and mindset towards financial matters, which influences their financial behavior.

For example, people with a positive outlook towards saving, planning, and managing their finances are more likely to behave responsibly. Therefore, a positive financial attitude provides the motivation and perspective to prioritize and manage finances.

Financial self-efficacy

Self-efficacy describes your confidence in your ability to make sound financial decisions. It is crucial to take initiative and maintain control over money. So if you’re low on financial self-efficacy, you tend to rely on others to manage your money.

The cost of financial illiteracy

In today’s complex financial world, the importance of financial literacy cannot be ignored.

Without it, you risk accumulating debt, experiencing financial stress, and not reaching long-term financial aspirations.

Unfortunately, most people in the world are financially illiterate.

A Standard and Poor survey indicates that only about one in three adults worldwide demonstrates a basic grasp of concepts like interest rates, compounding, inflation, and diversification.

The lack of financial knowledge varies considerably among different countries and demographic groups. Women, those with lower incomes, and less educated individuals often show greater deficits in financial literacy, even among developed countries.

Being ignorant of finance-related information has some serious consequences. It often results in less saving and investing, as people lack the skills to make informed financial decisions. This knowledge gap carries a real cost: A 2024 NFEC survey found that U.S. adults estimated personally losing an average of $1,015 that year alone due to a lack of financial knowledge.

Therefore, financial literacy is crucial because it empowers individuals to manage their money effectively. It enables them to budget, prioritize spending, save, and make informed decisions about financial products like loans and credit cards.

Moreover, it builds the confidence to navigate investments and strategically plan for a secure retirement.

How to improve your financial literacy

So far, the article has introduced the concept of financial well-being and financial literacy. The next part will provide a short guide to financial literacy for beginners.

Start with basic financial education

One study strongly indicates a direct and positive relationship between financial education and financial literacy.

This means that providing individuals with financial education significantly improves their understanding of economic concepts. In turn, individuals become less stressed about their financial status.

Therefore, regardless of age, “now” is always the best time to start. For starters, here are some tips to follow:

Attending online courses that cover financial topics. Various platforms and institutions usually offer these and come in structured courses that break down complex topics into easier-to-understand modules.
Reading finance books. This helps to understand complex financial concepts. They offer in-depth knowledge, practical advice, and real-world examples to build a solid understanding of how money works.
Listening to finance-related podcasts. Podcasts offer a convenient and often engaging way to learn during the commute, workout, or downtime. There are many options of podcasts covering everything from daily money tips to in-depth discussions on personal finance strategies.

Investing time in these beginner-friendly resources can yield significant long-term benefits, like improving financial knowledge and encouraging a more positive attitude towards responsible financial behaviors.

Create and stick to a budget

Budgeting is the process of creating a plan for managing one’s financial resources. This involves calculating income and average expenses to determine how funds will be allocated to various aspects of an individual’s life, considering both lifestyle and essential needs.

Therefore, review monthly expenses regularly to see where adjustments are needed.

This helps overcome impulsive buying by practicing self-control, mindful spending to ensure purchases align with the budget, and delayed gratification (waiting until the urge to buy disappears).

Individuals who can resist impulsive spending and adhere to their financial plans tend to experience better financial outcomes. This implies that the discipline to manage financial resources effectively is a key component of financial well-being.

In short, budgeting can be a tool to achieve financial clarity. This means that individuals can gain a clear overview of their financial flows by tracking income sources and planning costs (e.g., retirement savings).

Here are some examples to do it:

The 50/30/20 rule

Aim to allocate 50% of after-tax income to cover essential needs, such as rent, groceries, and transportation.

Then, dedicate around 30% to lifestyle wants, such as fun spending on hobbies, dining out, and entertainment.

Finally, commit 20% of your income to the future. Directly put it into savings, whether it is a retirement fund or an emergency allocation for unexpected life events. This gives you a clear framework for balancing current needs with long-term financial security.

A helpful tip for increasing savings is to arrange for a certain amount of money to automatically be deposited directly into your savings account from each paycheck.

Reverse budgeting

The core idea is simple: “Pay yourself first.”

Before thinking about bills or daily expenses, immediately set aside a specific amount for savings and investments. Then, with what is left, cover the essential needs like housing and food.

This approach makes saving a priority, not an afterthought. It focuses on consciously allocating money to long-term security right away, rather than hoping there is something left over at the end of the month.

Build long-term habits for financial health

Healthy financial habits are essential for achieving financial well-being. These habits can be linked to the five basic financial concepts: budgeting, saving, investing, debt management, and even using financial products/services.

But aside from those, there are some of the best long-term habits you can build:

Practicing disciplined and mindful spending. Build your self-control and delayed gratification muscles. This is applicable when using financial products/services to align spending with financial goals. Furthermore, these also contribute to avoiding getting into debt.
Budgeting and financial planning. Set financial goals within specific timeframes to track expenses. Develop strategies to pay off debts and reduce interest, as this frees up more money for other uses.
Prioritizing savings and investments. Regularly save and invest some of your income, no matter how small, to build security and work toward your financial goals. This habit aims to build long-term financial security.
Seeking financial education. This habit is equally important to improve understanding for better financial management practices.

Creating lasting habits is key to good financial health over time.

In conclusion

Remember how unpleasant it is to be overwhelmed by financial pressures? That sense that it is just an unavoidable part of adulthood? No more of that financial worry!

Be a financially literate adult. Be active in building a stronger sense of security and control in your financial life. Starting with basic education, creating a budget, and building healthy long-term habits, this journey will lead to a greater financial well-being and a more satisfying life.

So, take that important first step today. Start investing in financial education, for it is an investment for a stable future with a confident and empowered self.

If you want to see more resources on financial literacy, check out the Wellbeing Science Labs. The lab uses the research of the Institute for Life Management Science to produce courses, certifications, podcasts, videos, and other tools. Visit the Wellbeing Science Labs today.

Photo by shurkin_son on Freepik

Patricia Soharto